Before there is college to consider, you might want to ponder strategies for financing private school at the K–12 level.
By Steve Harrison
If you have children, or grandchildren, you may well have heard how important it is to save early and often for college—which is good advice, considering the high costs of higher education. But you’ll have to launch your savings and investment strategies even sooner if you’re thinking of sending your kids to private elementary or secondary schools, because they’re not cheap, either.
Just how expensive are private schools? The average annual tuition for private secondary schools is about $10,500, while the corresponding figure for private elementary schools is about $6,700, according to a recent survey by the National Center for Education Statistics, a division of the U.S. Department of Education. Costs vary widely, however, with faith-based schools being considerably less expensive than non-sectarian ones.
But in any case, unless you have a pretty large income, you might find it difficult to “cash flow” your children’s tuition bills at a private elementary or secondary school. So it’s worth looking at your savings options. Here are a few possibilities:
Coverdell Education Savings Accounts
You can put up to $2,000 per year, per child, into a Coverdell Education Savings Account, or ESA. Your earnings accumulate tax-free, and withdrawals are tax-free, too, provided the money is used for qualified K-12 or postsecondary educational purposes. When you contribute to a Coverdell ESA, you have considerable flexibility in how the money is invested—you can choose stocks, bonds, government securities and other investment vehicles. Keep in mind, though, that the ability to contribute to a Coverdell ESA is phased out at certain income limits, and that withdrawals used for non-qualified expenses may be subject to federal and state taxes plus a 10 percent penalty.
When you establish a custodial account—typically known as either an UTMA or UGMA account—you can make irrevocable gifts to minors in the form of either cash or securities, such as stocks or bonds. You can fund a custodial account regardless of your income, and there are no contribution limits (although an individual gift of over $14,000 may be subject to the federal gift tax).
Part of the earnings in a custodial account may be federally tax-exempt, while some of the income could be taxed at your child’s rate, but, to be clear about taxation issues, you’ll need to consult with your tax adviser.
If the goal is to send your child to the private school of your choice, you can get there much easier by starting early and considering all the investment and financing possibilities.
Don’t forget, though, that if you don’t use the funds to pay for school or other expenses for the child’s benefit, the money will eventually go to your children when they reach the age of termination—at which point they’ll have control of the assets. The age of termination varies by state, and some states may have additional provisions that allow the age of termination to be extended at the time the account is established.
You may find that other investments can be useful in paying for education. For example, you might consider investing in a “zero-coupon bond” that matures at a particular time in the future, such as when your child is ready for school.
You won’t receive regular interest payments with a zero-coupon bond, but because you purchase it at a deep discount, you might find it to be an affordable investment choice. (However, even though you don’t actually receive annual interest payments, you’ll still be liable for the taxes on them.)
Finally, keep in mind that most pri-vate schools act much like colleges in that they can award financial assistance and scholarships, so don’t hesitate to ask about them.
By starting early and forming a strategy that considers your savings and investments with whatever potential aid packages may be available, you may find that you can afford to send your children to the school of your choice.
Steve Harrison is a financial adviser for Edward Jones in Overland Park, Kansas.
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